The Lean Startup - by Eric Ries

Posted on March 7th, 2015

This book has now become a classical for any person trying to start a company that isn’t going to replicate an established business. It may be a product (software or hardware) or a new service. So long as what you’re going to start isn’t just replicating an established and well understood business, you should read this book. The fact that it is associated to the start up world of silicon valley is an “unfortunate" association that excludes many businesses that could benefit from multiple ideas in the book.

Eric starts by debunking the myth that start ups are about getting brilliant energetic young people to work in their garage having the right idea at the right moment and magically obtaining success. He points out that to make a start up work, one needs management. Not the traditional management that one usually finds in common large corporations. He provides his own example at IMVU, a company he founded and grew with three other co-founders. IMVU will be used largely throughout the book as a reference and example for many of Eric’s arguments. His main short point is that one has to try things ago and get feedback from customers to build something meaningful. Planning and hiding your product only increases the risk it doesn’t solve anybody’s problems.

He points out five principles for the Lean Startup method:

Entrepreneurs are everywhere. This includes the stereotypical garage but also large organizations, governments and any other group of people who works at “a human institution designed to create new products and services under conditions of extreme uncertainty".

Entrepreneurship is management. One has to manage the risks and uncertainties by validating and testing assumptions and deciding based on those results (not vanity metrics which he will explain later) what course of action to follow.

Validated learning. Startups are about learning how to build a sustainable business with scientifically valid approaches.

Innovation accounting. The measure part of the Build-Measure-Learn cycle is the tricky one because so many people are used to measuring the wrong thing. Innovation accounting is a proposal to measure better and more useful things and hold people accountable for the results discovered.

The rest of the book is divided in three main Parts: Vision, Steer, Accelerate.

In Vision, Eric goes into explaining the origins of the Lean Startup method in Lean Manufacturing, which originated in Japan with Taiichi Ohno and Shigeo Shingo from the Toyota Production System. Eric makes a metaphor that building a startup is a lot like driving a car in that we have to constantly adjust our direction and speed according to the feedback we get from the road. In his view, most startup plans, however, are laid out like we were going to launch a rocket out of the atmosphere: any slight mistake can destroy the whole thing. This is not the case.

He moves to talk about issues around traditional management and why it doesn’t work in a startup but that doesn’t mean large organizations cannot benefit from it. So long as one has a bit of “a human institution designed to create new products and services under conditions of extreme uncertainty", then there is a startup and there is (or should be) an entrepreneur.

Vision finishes by getting ready for the next part: identifying what it is that needs to be validated and how to effectively validate it. The answer is that we validate learning and, unfortunately, previous attempts to prove that learning have failed and left a bad reputation. Therefore we need to apply a scientific method: experimentation. Establish hypothesis, define a test, execute it, measure the results and validate or invalidate the hypothesis based on those results.

Two basic hypothesis are important:

Value hypothesis: the product or service delivers value to the customers when they use it

Growth hypothesis: customers will discover the product or services in a way that is sustainable for the startup

In Steer, we move on to understanding how to go about testing assumptions and iterating. The goal is to minimize the time to go through a full loop of the Build (creates product) - Measure (obtains data) - Learn (generates ideas). To do so, we must identify what Eric calls the leap-of-faith assumptions. Those are the core assumptions that the start up makes and need to be quickly identified and validated if possible. This is the goal of the famous MVP (Minimum Viable Product). The product with the least features that can help you go through a full Build-Measure-Learn loop as quickly as possible and decide whether to persevere or pivot.

Eric moves on to talk about how to define strategies and ideas about analogs and antilogs that both provide us with previous successful examples and previous opposite behaviors. Those can help identify good arguments in favor or against your plan. He also advocates for genchi gambutsu, or “go and see for yourself". A principle from Toyota that calls for everyone on the business to understand their customer deeply.

As we continue Eric reinforces the need to try small simpler versions of your product to get feedback even if it means faking those features with humans behind it. He describes a number of techniques to build MVPs that are unexpected:

The video MVP: just a video showcasing usability of the product that measures desire from potential customers

The concierge MVP: very few users but those get premium treatment from the startup by having people assigned directly to them

People behind the curtain MVP: looks like software but really is people answering your questions/requests/demands.

He moves on to explain that quality is a variable thing and that “if we do not know who the customer is, we do not know what quality is".

As we continue, we get to one the most interesting parts of the book: innovation accounting. Eric goes in length into what vanity metrics are and how to switch to actionable metrics. The former being metrics that don’t represent the acceleration of growth but rather just the speed of it (which may increase even though it’s really slow). The latter focusing on what is growing and how.

Eric finished the Steer part by addressing the question of whether to persevere on an idea/hypothesis or to pivot and change the approach. He defines the lifespan of a startup and the number of pivots that startup can still make. It can shrink or expand according to investments, spendings and cost of each experiment and should be measured as such. However those decisions should be made based on facts collected from tests and not emotions or feelings from team members. He goes on to describe some types of pivot that can happen:

Zoom-in pivot: when a feature of the previous product becomes the whole product

Zoom-out pivot: when the previous product is considered merely a feature in a bigger product

Customer segment pivot: when the customer group changes

Customer need pivot: when the problem we were trying to solve is not the main one the customer has

Platform pivot: when a startup switches between having a platform with many applications to one application or vice-versa

Business Architecture pivot: when a revenue model switches from Business-to-Business (B2B) to consumer products or vice-versa.

Value Capture pivot: when the way the startup collects value switches. This can mean how a startup makes money but also what sort of value is captured (money or information or reach or etc)

Engine of Growth pivot: when the way a startup spreads out changes (viral, advertising, individual reach, etc)

Channel pivot: when the way to reach customers changes

Technology pivot: when the way a company provides a solution changes

In the last part, we look at how to accelerate. Once startups are working, they will eventually need to grow and Eric argues strongly that size is not something that would get in the way of being Lean. He starts off explaining some of the advantages that small batches present by using some manufacturing examples. Doing the same thing many many times seems intuitively more productive as we assume that we will get better at that one thing quickly. However, keeping small batches allows us to identify problems faster as we go through the whole process. It also allows us to deliver partial results faster. Imagine two tasks that need to be done 10 times each. Each task takes 6 seconds to be completed. If we complete all of task 1 and then all of task 2, we have all finished products in 2 minutes. However, if we are stopped after 1 minute, we cannot deliver anything. If we, on the other hand, complete task 1 then 2 and go back to task 1 and 2 for the next product, even if we consider that we need say 3 seconds to go back, by the end of the first minute, we have completed 4 products and are ready to produce more. Not only that, but it also takes us 6 seconds (and only one unfinished product) to find out in this case if the outcome of task 1 is compatible with task 2. While in the other strategy it takes us 1 minute and 10 unfinished (and potentially wasted) products.

In the case of a Lean Startup, the product is learning (as previously stressed). So the smaller the learning, the faster we will be able to grasp it and react accordingly. In software, this means less changes and more frequent releases. Those gated by a technical andon cord which allows the system to “stop the line" in case of identified problems.

Large batches incur more planning, more effort for each batch and longer times between batches in exchange for an economy of scale benefit. There are many scenarios in which those benefits come at even more prices. Whenever we talk about anything that perishes over time, there is an obvious cost at leaving things waiting. But even non perishables create larger stocking cost as well as larger initial investments.

With smaller batches, you can also move to a pull system which reacts to events instead of trying to predict them. Smaller stocks reduce the chance (or the quantity at least) that those stocks will become waste. As soon as an item is grabbed from the small stock, it can trigger a pull to the producing side to replenish that one single item.

Eric moves then to the engine of growth which is what he calls the strategy for the startup to grow. He lists 4 common growth powers:

Word of mouth: customers/users are so proud/excited that they will talk about the product/service to their network and attract new customers

Side effect of product usage: certain products/services cause others who are not customers to be exposed to this new product/service. As a result, they may be attracted to become customers/users themselves.

Through funded advertising: This is the common traditional one where a company advertises the new product/service in order to obtain new customers. Eric stresses that this is only an engine of growth if the cost of advertising is covered by the company’s revenue and not one off sources such as investment capital.

Through repeat purchase or use: Some services or products are built around the idea that the customer will come back and pay again and again and again (like groceries or a subscription).

From those, he defined 3 engines of growth:

The Sticky Engine of Growth: this engine relies on the fact that customers who start using a service/product will stick along with it for a long period of time. Companies modeled around this engine have to watch their attrition and churn rates very closely to understand whether they are actually growing or not. In general, if the rate of new customer acquisition is higher than the rate at which costumers leave, the company will grow.

The Viral Engine of Growth: this engine relies on network effects to boost the awareness and adoption of the product or service. Online social networks are a clear example of products that rely on this engine. Success in a viral engine is determined by the viral coefficient which is how many new customers are attracted by an existing customer. Any viral coefficient higher than 1 is a sign of growth. It means that for each customers that we get in the network, he or she will attract at least one more person and a little more. The exponential effect makes it so that any tiny improvement in growing the viral coefficient above 1 is hugely valuable.

The Paid Engine of Growth: this engine is all about getting customers to pay to use the product. A healthy paid engine of growth is one where the cost to attract a new customer in is less than the profit generated by that customer over its lifetime as a customer. The variables in this scenario are the cost of attracting new customers and lifetime revenue generated by a customer. We can grow faster by reducing the cost to attract new customers or by increasing the revenue generated by a customer.

Although most products and services will likely have a bit of all 3 engines of growth, focusing on a single one allows for a startup to make more conscious decisions about what to validate and which experiments to create. It will also determine the product/market fit since it’ll hint which communities to reach to and how.

Eric follows by explaining that engines of growth, for as good as they are, will eventually run out of power. There are only so many early adopter customers we can reach in a network, only so long that we can hold a customer around and only so much revenue we can make out of a lifetime customer. At some point a company needs to transition to the mainstream customers. And those are different to please than early adopters. Startups should recognize that and be prepared to shift gears and priorities accordingly.

Adapting is the next focus going into why it is important to adapt to the situation the company faces. And, in order to adapt, a company must have a certain level of quality built into the product. Quality is something that changes over time depending on the users of the product/service but not being careful about it can hinder a startups’ ability to react to new findings. One powerful tool to allow a deeper quality and adaptation is known as The Five Whys. It’s a simple process in which for every identified problem, we ask ‘why did this happen?’, write the answer down and then reply to the answer with another ‘why?’ question. Doing so 5 times usually takes us closer to the real root cause of the issue and provides a path to invest in quality spending most efforts at the root of the issue and less at the surfacing one in order to get the best return on investment. However, Eric cautions the readers about the common miss-use of this tool to find “guilty people" for the observed issues. If blame gets into the exercise, the company rapidly develops at culture of mistrust and hiding issues which directly and immediately hinders the company’s ability to react.

Finally, the books closes by address the point of maintaining innovation in mature or large organizations. His suggestions is mainly to recreate a third party startup environment within a company. Secure funds, be granted autonomy and ability to reach out to their needs and demand results. He also cautions people about the problems that this solution causes upon re-absortion of the startup in the larger organization. He suggests than an Innovation Sandbox that allows for any team to run experiments and obtain actionable metrics to drive their development. He also mentions that some people will stick with the product and some people will stick with experimenting and this is normal and should be allowed.

In the epilogue, Eric talks about evolving our companies and products around the scientific method as a way to reduce waste in general and allow us to find a sustainable industry development that better uses our cognitive abilities and natural resources.

My opinion:

Overall, the book is more valuable than the summaries most people give of it. The one word that the book made widely common is ‘pivot’ which I don’t believe should be nearly as important as other good ideas in the book. The Build-Measure-Learn loop is a nice adaptation of Deming’s PDCA. The idea that a startup lies on two fundamental hypothesis (value and growth) is an awesome basis to get a company started as well. I would definitively recommend the book to anyone thinking about starting a business that wants to suggest a new way of doing things or creating a new product.